Convergence: it's not just communications

Until the mid-1990s, communications networks were built around distinct technologies. Each network did one thing well; telephone networks were designed to handle voice services, while cable networks delivered video.

This began to change in the latter part of that decade. The emergence of IP (or Internet Protocol)- based communications, digitization, packet switching and higher-capacity lines meant that each of the formerly separate network technologies could deliver communications services of many kinds – voice, video and data. The word “convergence” emerged to describe this term, and was popularized by Nicholas Negroponte in his famous book, “Being Digital.”

Today, we give no thought to the fact that thousands of different networks are interconnected using a variety of technologies, while at the same united around IP protocols. Competition among industries that were formerly separated by walls of analog network technologies has blossomed. The rapid evolution of IP networks, technologies, and services has helped transform many other sectors. One such sector is manufacturing.

Modern, large-scale manufacturing is global in scope. For decades, manufacturing was highly labor intensive and required that large stocks of materials be kept on hand. The manufacturing process also required other inputs, such as communications services. But these did not comprise a substantial portion of the value of the finished products, and so were not strategic inputs fundamental to successfully producing globally competitive goods.

That has all changed. Today, communications and information services are an integral part of any successful manufacturing operation. The U.S. has one of the top ten[PDF] communications and IT systems in the world. A recent report by the McKinsey Global Institute found that the integration of these services into manufacturing jumpstarted “manufacturing convergence” – merging traditionally separate functions and systems to create unique new capabilities within the business. With people, processes and technology in unison, manufacturers can achieve higher levels of business performance, innovate more effectively, change product lines more quickly, turn resources into assets, and discover unique opportunities for competitiveness.

Within the last decade or so, advanced communications and information services have become an integral and strategically vital part of the manufacturing process. These services have become so important that they make up to 20 to 25 percent of the value of a finished product in some industries. Successful manufacturers use communications, information technology, cloud services and the like to coordinate manufacturing systems, design and distribute vital drawings and schematics that guide the building of products, and keep real-time track of inventory and draw-downs of vital materials. This new form of convergence has made manufacturers in the U.S. more competitive, and allows manufacturers of all sizes to grow their business globally and with the confidence it can be sustained.

But this synergy cuts the other way, too. In order to build and improve their networks, U.S. communications providers rely heavily on network equipment manufacturers that make advanced servers, routers, and fiber optic cables. As the McKinsey report notes, “just as manufacturing creates demand for service inputs, services also create demand for manufactured goods.” U.S. network providers have invested over $1.2 trillion over the last decade, and are continuing to invest today in advanced networks such as 4G LTE mobile networks.

In effect, a virtuous cycle has developed between network providers and manufacturers. More and more, manufacturers need advanced communications services and IT to remain competitive. They need the continuing improvements in these networks to become even more innovative and efficient. At the same time, network providers need the high-tech products manufacturers build to create, install, operate and improve their networks. This is a new convergence, but one that helps the U.S. remain globally competitive.

The result, according to the report, is reflected both in the percentage of a manufactured good’s value that reflects communications and IT services, and the percentage of service-related employment in manufacturing, as shown in these charts from the McKinsey report.

The convergence of manufacturing with communications and information services highlights the need for manufacturers and communications companies to be able to maintain flexibility within their business models and operations to quickly and efficiently manage their risks and long-term investments. The goal is to “make each strategic choice less critical, less permanent, and less costly to reverse or redirect.” It is important then to support an environment that allows companies to swiftly respond to shifts in this burgeoning market of interconnectivity and to become more resilient and prepared for continued evolution in the marketplace. The advantage of this new convergence is the ability of all firms to change and relentlessly innovate. If they are unable to do so because rigid U.S. policies or regulations that interfere with needed changes, the U.S. ability to compete globally will suffer.